@ Supply Chain Management

It is time to stick your neck out and predict the future. Oh! well, it is time for me to stick my neck out and predict the future of supply chain management. And unfortunately for everyone in this space, it is going to be a dismal one. In short, I’m predicting dark and gloomy times ahead for supply chain management and allied activities. Let’s start with the different constituents:

Supply Chain Software – Bug fixing and maintenance is in your future and not code rewrites from scratch with some fancy new hookups. Unless you plan to dramatically hunt overseas for markets. I am thinking that this space is probably dead for another 3-5 years.

3PLs – A lot of consolidation will happen in this space as smaller and medium firms are pushed to the brink – the larger firms will get to binge in a bit.

4PLs – I think we can safely consign them to the dustbin of history – a bridge too far and a manager of managers is not where this space is headed.

Supply Chain Integrators and Consulting services – I think that the ones that have an overseas presence will stand to make something of the shift that is occurring. As for stateside, they will get leaner and leaner still.

Green Supply Chain – I think you’ll hear a lot of noises, needless calculations and carbon offsets in this space but any growth here is predicated on a robust global economy or rather one would need a green supply chain if there was a real growth in the supply chain to begin with. What if the scope and scale of supply chains themselves decrease? Of course governments are willing and able to tack on numerous regulations to the activity of global commerce but global commerce at what level – at the 2007 peak or the 20xx trough. Further, why would consumers be willing to accept the increased costs that producers will pass on to them in an environment in which consumption itself is being curtailed? Besides the green supply chain is a malady of the developed world and there is every indication that the growing economies of the world would discard it outright.

Supply Chain Prognosticators (such as moi) – Twiddle dum and Twiddle dee. I suppose I’ll find something else to blow hot air about.

On a more serious note, there is likely going to be a lot of work to do overseas but just not here. Don’ t take my word for it but growth is what higher and more complex abstractions of Supply Chain Management products and services manage, not flat lining or worse yet contraction. Some time ago, the refrain used to be, “Go West, young man, go west.” Well, I think we’ve come to the point where it begins to ring true yet again. And don’t let a trifle such as the pacific ocean get in the way.

On a still more serious note, such reading of the entrails demands extraordinary evidence. Actually, it doesn’t. It just demands ordinary evidence of which I have one very important data point. Better yet, it is available for free (Actually not, you just paid for it already) : U.S. Household Deleveraging and Future Consumption Growth

It’s a short piece. It’s timely and absolutely worth reading.

Some highlights,

Where we came from,

U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007.

Where we are at now,

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income.

I’ll let that number sink in a bit. And I’ll tell you why – if you felt like the world was ending, that was in reality based on a mere 3% reduction of leverage. In other words, we received something like a pin prick. Further, there is a hammer the size of the Empire state building coming straight at you.

A parallel can be found in the Japanese experience (but treat it as illustrative and not indicative of anything)

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

I suppose the comparison to Japanese household would have been skewed because of their natural saving habits. Who knows? If a similar scenario were to occur stateside and a reduction in household leverage of about 30% were to take place or say even 15%, what effect would that have on the supply chain industry? That is my question, to you and to myself. To me, it seems that all this shaking and quivering has taken place before the real earthquake hits.

In their conclusion of the likely scenario going forward,

Assuming an effective nominal interest rate on existing household debt of 7%, a future nominal growth rate of disposable income of 5%, and that 80% of future saving is used for debt repayment, the household saving rate would need to rise from around 4% currently to 10% by the end of 2018. A rise in the saving rate of this magnitude would subtract about three-fourths of a percentage point from annual consumption growth each year, relative to a baseline scenario in which the saving rate did not change. An even larger subtraction from consumption growth would occur relative to a baseline in which the saving rate were declining, as occurred prior to 2005. In either case, the subtraction from consumption growth would act as a near-term drag on overall economic activity, slowing the pace of recovery from recession.

By the way, everything in this post can be condensed into one sentence – “Leverage is gone. And it is not coming back for a long time.” I think you will find that this statement will be a sort of touchstone for many in these times.

“Go west, young man, go west.” Go where the growth is going to be.